Managerial Investment Ability and Accruals Quality

• In Event: Financial Accounting and Reporting 9

Abstract

In this paper, we study whether managers’ investment ability influences accruals quality. Since the quality of accrual-based earnings is affected not only by accounting measurement systems but also by fundamental performance from real investment activities of a firm, we examine whether accruals of firms that hire managers with high investment ability are more likely to be converted into future cash flows. Using the AKM method in identifying manager-specific ability, we provide evidence that managers’ ability is positively associated with the extent of mapping from accruals into cash flows. We further find that the managerial ability related to the accruals quality in fact represents managerial investment ability that makes stronger the contemporaneous association between changes in the level of investment and operating earnings. Overall, our findings suggest that managerial investment ability is one of the important determinants of firms’ fundamental performance that affects accruals quality.

Author

• Sam Han, Korea University Business School